"'Don't catch a falling knife' ... The idea of buying a former superstar stock at a discount price certainly has its attractions, but you've got to make sure you catch the haft -- not the blade."
So runs the thesis of my recurring Fool column "Get Ready for the Bounce," in which we search among the wreckage of Mr. Market's overturned cutlery drawer, hoping to find future winners in a pile of 52-week losers. But do we really need to sit around for a whole year, waiting for a potential bouncer?
I say nay. Sometimes, stocks fall far in far less time than a year -- and like a superball dropped from the balcony, the harder they fall, the higher they bounce. Today, we're going to look at a few equities that've suffered dramatic drops over the past week. With a little help from the 140,000 members of Motley Fool CAPS, we hope to find an opportunity or two for you:
|
Stock
|
How far from 52-week high?
|
Recent Price
|
CAPS Rating
(out of 5)
|
|
St. Jude Medical (NYSE: STJ )
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-19%
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$34.10
|
****
|
|
AMAG Pharmaceuticals
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-37%
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$36.72
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***
|
|
Ciena (Nasdaq: CIEN )
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-23%
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$12.84
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***
|
|
MannKind (Nasdaq: MNKD )
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-46%
|
$6.62
|
**
|
|
MBIA (NYSE: MBI )
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-42%
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$6.16
|
*
|
Companies are selected by screening on finviz.com for abrupt 10% or greater price drops over the past week. 52-week high and recent price data provided by finviz.com. CAPS ratings from Motley Fool CAPS.
Five super falls -- one superball
After a slow start for October, Mr. Market roared back to life last week. Unfortunately, in the process it seems to have run over these five stocks.
MannKind decided to wait to find a partner to help market a new inhaled-insulin drug after it became increasingly clear that a deal was not going to happen before a final FDA ruling (perhaps that shouldn't surprise. The concept has baffled pharmaceutical giants from Pfizer (NYSE: PFE ) to Eli Lilly (NYSE: LLY ) due to potential side effects and a lack of confidence in the regulatory environment.) Fellow biotech pioneer AMAG Pharmaceuticals was hit and run by two analyst downgrades in the last month or so. While Ciena was in full control of its own auto wreck, investors didn't take at all well to the company's planned purchase of Nortel's assets.
Likewise with St. Jude Medical. As fellow Fool Matt Koppenhoffer pointed out last week, the medical device maker has only itself to blame for ratcheting back earnings guidance last week. But here's the thing: St. Jude only sliced about 7% from its third-quarter guidance. Can a single-digit shortfall -- and a readily explainable shortfall at that -- really justify chopping 13% off the company's market cap?
The bull case for St. Jude Medical
A lot of Fools think not. CAPS All-Star PearlandTX, for example, comes right out and states that the: "Recent significant drop in share price does not reflect long-term prospects for this company." Back in January, Fellow All-Star MedDeviceENGR called St. Jude: "by far one of the leanest operating Medical Device companies out there."
And lest we forget, another of our All-Star investors -- Persuter this time -- reminds us that: "The baby boomers are going to spend almost all their accumulated wealth on keeping themselves alive sometime in the next ten to twenty years."
Unfortunately, I have to break with the majority on this one. For while I agree with everything my fellow CAPS members have said above, the fact remains that investors were right to sell off St. Jude last week, for a reason no one has mentioned yet:
It costs too much
Selling for 27 times earnings and 21 times free cash flow, St. Jude is one pricey piece of medical equipment. Now, I should point out here that I'm not averse to paying up for quality in medical stocks -- especially when the growth rate justifies it. Stellar growers like Intuitive Surgical (Nasdaq: ISRG ) , for example, have won my support in the past, high prices notwithstanding.
Problem is -- and I hate to break the bad news to you, but -- baby boomers aren't nearly sick enough to justify the price you're being asked to pay for St. Jude. To the contrary, they're exercising more, smoking less, and consequently, living longer. Considering the trends, analysts only expect to see five-year growth of 13% at St. Jude -- and that's not nearly fast enough to justify the stock's high price... not even after last week's sell-off.
Time to chime in
My advice, therefore, would be to swallow your pride, acknowledge the mistake of buying this stock, and reevaluate the situation -- but of course, that's just my opinion. If you don't agree, then not only do I not blame you, but I'd actually love to hear why you think this argument is bunk.
If you believe that St. Jude's prospects justify its high price, then here's your chance to make the case. Click over to Motley Fool CAPS and sound off.
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